RBA boss says there is room for rate cut

AUSTRALIA'S top central banker has hinted that interest rates could be cut again in order to boost business confidence.

Reserve Bank of Australia governor Glenn Stevens told a business lunch on Tuesday that subdued business confidence is a concern, and needs to improve to help rebalance Australia's economy as the mining investment boom winds down.

"There are clearly signs of policy working in this respect, though not, to date, by so much that we see a serious impediment to further easing, were that to be appropriate from an overall macroeconomic point of view," Mr Stevens said.

He said recent inflation data had not shifted the RBA's assessment that the inflation outlook could afford scope for further rate cuts.

The comments gave the Australian dollar a whack, after some investors interpreted them as a hint the RBA would cut rates next week.

The futures market is now pricing in an 89 per cent chance that the RBA will cut the cash rate in August.

Mr Stevens said it was well understood that the mining boom was shifting gear.

"We would like to see a 'rotation' to other sorts of demand as the resources sector demand slows," he said.

That rotation would likely involve more net foreign demand for Australian output other than mining, he said.

For a smooth rebalancing to occur, Mr Stevens said several ingredients were needed, including business confidence.

"It is somewhat concerning that the business community's confidence has been quite subdued in recent times," he said.

"To the extent that substantial structural change has been occurring, and there is inevitable uncertainty over the international outlook, it is quite understandable that some business segments have found the going hard and don't feel very confident.

"Unfortunately, it is not a straightforward thing to turn sentiment around."

It is important that regulatory changes do not inadvertently make it harder for businesses to plan with confidence, to achieve better cost and productivity performance, or to take a chance on a new product or investments, Mr Stevens said.

The RBA governor also said it would not be a "major surprise" if the Australian dollar continued to fall.

At 1311 AEST, soon after Mr Stevens began speaking at the function, the Australian dollar hit 90.92 US cents, down from 91.63 US cents at 1300 AEST.

Earlier on Tuesday, the Australian dollar also took a hit after the Australian Bureau of Statistics said approvals for the construction of new homes fell for a second month in a row, down 6.9 per cent in June, seasonally adjusted.